How is partner basis figured?

The basic rule

Basis is the number the tax system uses to remember what you have already been taxed on, or have paid for, inside a partnership. Publication 541 says the basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. If the partner had to recognize gain because of the contribution, that gain is included too. If you take on part of a partnership’s liabilities, the increase in your individual liabilities counts as a contribution of money. That is where every partner’s basis begins, and from then on it moves up and down each year.

Basis matters for three reasons. It caps the losses a partner can deduct, because the publication notes that a partner’s distributive share of partnership loss is limited to the adjusted basis of the partnership interest. It decides whether a distribution of money is tax free or produces gain. And it is the starting point for gain or loss when the interest is eventually sold or liquidated. A partner who loses track of basis can overpay in any of those three places.

What raises basis

Under the publication’s Adjusted Basis rules, a partner’s basis is increased by additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities; by the partner’s distributive share of taxable and nontaxable partnership income; and by the distributive share of the excess of deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. The nontaxable income piece is easy to miss. Tax-exempt income reported to you on Schedule K-1 raises basis even though you never paid tax on it, which keeps it from being taxed later when you sell.

What lowers basis

Basis is decreased, but never below zero, by the money and the adjusted basis of property distributed to the partner, including a decreased share of partnership liabilities or an assumption of the partner’s individual liabilities by the partnership. It is also decreased by the partner’s distributive share of partnership losses, including capital losses; by the share of nondeductible partnership expenses that are not capital expenditures, including the partner’s share of any section 179 expense even if it cannot all be deducted on the partner’s own return; by the depletion deduction for partnership oil and gas wells, up to the partner’s proportionate share of the wells’ adjusted basis; by the share of foreign taxes paid or accrued by the partnership for tax years beginning after 2017; and by the share of the adjusted basis of partnership property donated to charity.

A worked example with made-up numbers

Maya joins a partnership by contributing $10,000 in cash. In the first year her distributive share of income is $6,000 and she takes a $2,500 distribution. Her basis at the end of year one is $10,000 plus $6,000 minus $2,500, which is $13,500. In year two the partnership has a bad year and her share of the loss is $9,000. Her basis falls to $4,500, and the whole loss is deductible so far as basis is concerned. Enter those figures above to check the arithmetic. If the year-two loss had been $15,000, the extra $1,500 would run into the zero floor, and the publication’s loss limit is why only the amount covered by basis can be used that year.

Basis is not your capital account

The publication is blunt that the adjusted basis of a partner’s interest is determined without considering any amount shown in the partnership books as a capital, equity or similar account. Its example: Enzo contributes property with an adjusted basis of $400 and a fair market value of $1,000, while his partner contributes $1,000 cash. Both capital accounts on the books show $1,000, but the adjusted basis of Enzo’s interest is only $400 and his partner’s is $1,000. A K-1 capital account, a bookkeeping balance and tax basis are three different things, and only the last is used for the rules above.

How debt and a partner’s own liabilities move the number

When contributed property is subject to a debt, or the partnership assumes a partner’s liability, the partner’s basis is reduced, but not below zero, by the liability the other partners assume, because that is treated as a distribution of money to the contributor. The publication’s example has Ivan contribute property with an adjusted basis of $8,000 and a $4,000 mortgage for a 20% interest. The other partners take on 80% of the mortgage, $3,200, so his basis is $4,800. With a $12,000 mortgage, the other partners assume $9,600, which is $1,600 more than his $8,000 basis, so his basis is zero and the $1,600 is treated as capital gain from the sale or exchange of a partnership interest. That gain does not increase his basis. The full liability rules are covered in our page on whether partnership liabilities increase basis.

When the number is measured

The publication says the adjusted basis is ordinarily determined at the end of the partnership’s tax year. If all or part of the interest was sold or exchanged, or the entire interest was liquidated, it is determined on the date of the sale, exchange or liquidation. So a partner who sells in June needs a basis figure as of June, not December.

Gifts, inheritances and the alternative rule

This page covers an interest acquired by contributing money or property. If you received the interest by gift or inheritance, or any way other than a contribution, the publication says to use the basis rules in Publication 551 instead. It also offers an alternative method for the rare partner who cannot practicably apply the general rules: figure basis from the partner’s share of the adjusted basis of partnership property that would be distributed if the partnership terminated, as long as the result would not vary substantially from the general rules, with adjustments for contributed property, transfers of interests and distributions.

Where to keep the records

The publication points to a worksheet for adjusting the basis of a partner’s interest in the Partner’s Instructions for Schedule K-1 (Form 1065). Keep the opening contribution records, each year’s K-1, and a running schedule of distributions. The most common error is rebuilding basis years later from memory.

Sources

• IRS Publication 541, Partnerships (12/2025): Basis of Partner’s Interest (Interest acquired by gift, Adjusted Basis, Increases, Decreases, Partner’s liabilities assumed by partnership, Book value of partner’s interest, When determined, Alternative rule for figuring adjusted basis); Exclusion From Partnership Rules (loss limit). Read November 2, 2026.

Edition read: Publication 541 (12/2025), Partnerships, as posted on irs.gov. Rules and dollar amounts can change; check the current publication and the Instructions for Form 1065 for your tax year. This page summarizes the publication and does not replace it. The worked examples with named people are the publication's own; the other examples use made-up numbers to show the arithmetic.